Overhauling America

In the post “Chrysler’s resurrection” I wrote about James Stewart’s New York Times puff piece portraying the new Chrysler as a great success story. The Obama administration’s treatment of the auto companies and ongoing deceptions regarding the financial success of the treatment deserves more attention than it has received. In the Age of Obama, the enormities accumulate so quickly it’s hard to keep up.

Steven Rattner was the Obama administration’s auto czar. He published his memoir of his tenure — Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry — almost a year ago. Rattner observes of an early Times article on the Obama administration’s treatment of GM and Chrysler: “Without getting a single fact out of place, the piece showed [Obama] just as the White House had hoped: studying the issues in depth, delegating effectively, being decisive when necessary and frank about his beliefs.” There is a certain consistency to the Times’s approach to these matters.

The screwing of the Chrysler bondholders was the signal event in the administration’s disposition of Chrysler. It gave rise to Michael Barone’s original diagnosis of the Obama administration’s distinctive use of “Gangster Government” to achieve the administration’s objectives.

What does Rattner have to say about the screwing of the Chrysler bondholders? Not much. Here it is:

Under the strict rule of priority in bankruptcy, senior creditors are intended to be paid in full before any other stakeholder gets a penny.

But bankruptcy law also provides that a new investor — which the government was, in effect — can allocate its capital however it chooses. We believed that it was in the taxpayers’ interest to give Chrysler equity to Fiat in return for technology and management. And we believed that giving the VEBA [the UAW retiree medical benefits trust] a mix of debt and equity was also business — as Ron [Bloom] and had told Jimmy {Lee, Jr., of JPMorganChase, Chrylser senior lender], you need workers to make cars. And while the $2 billion that Chrysler’s banks were getting was far less than the face value of their loans, it represented more than 100 percent of Chrysler’s assets, as the company’s liquidation value indicated. By that measure, they were getting more than they deserved. In fact, every single creditor of Chrysler received more than it would have in a liquidation.

That’s about it, and you might say it’s a little thin. “You need workers to make cars”? Were the Chrysler employees going to quit if Chrysler’s bondholders received the priority to which they were entitled? I’m not sure I follow the train of thought.

In email correspondence with Todd Zywicki, Professor Zywicki has asked the rhetorical question: If this is all routine, why doesn’t Rattner cite another case in the history of American bankruptcy law where unsecured creditors received a 50 percent larger distribution than secured creditors. He doesn’t because there isn’t one. Moreover, Professor Zywicki adds, the valuation procedure left a little to be desired. And one might wonder why GM’s secured creditors got 100 cents on the dollar. Professor Zywicki asks another rhetorical question: Does that mean the secured creditors at GM fleeced the unsecureds?